Foreign investment grows private health care in Kenya

Kenya’s health care sector has benefitted from a substantial inflow of new capital in recent years, as private investors rush to take advantage of new growth opportunities in hospitals, pharmaceutical companies and human resource development. This comes as the country’s public health system copes with a patient capacity burden and insufficient funding, problems that prompted doctors strikes in 2016 and 2017.

Out-of-pocket payments already account for a significant amount of health care spending in Kenya, with the country’s burgeoning middle class further supporting private growth. New investment in training activities should help the private sector avoid a human resource gap, even as rising numbers of public health care workers transition to the private sector.

Funding Shortfall

Public spending on health care has fallen below the targeted 15% of total expenditure as declared in the 2001 Abuja Declaration, standing at KSh60.3bn ($588.3m) in FY 2016/17, or 3.6% of total expenditure. According to the FY 2017/18 budget statement, health expenditure is forecast to rise 1% to hit KSh60.9bn ($594.2m), remaining at 3.6% of total expenditure. Estimated expenditure will rise by 1.77% to KSh62bn ($604.9m) in 2018/19 and 1.26% to KSh62.8bn ($612.7m) in 2019/20, equivalent to 3.6% and 3.5% of planned expenditure, respectively. Recurrent expenditure, including salaries, will also remain relatively flat, with the budget statements showing recurrent expenditure increases of 1.69% annually from a projected KSh29.6bn ($288.8m) in 2017/18, to KSh30.1bn ($293.7m) and KSh30.4bn ($296.6m), in 2018/19 and 2019/20, respectively.

Rising Demand

Because of this, private health care has become an increasingly popular choice for many Kenyans. According to a 2016 report published by the Netherlands Enterprise Agency, the public sector accounted for 37% of total health spending in the country, compared to 40% in the private sector. Private health care also offers more employment opportunities for Kenyan health professionals. In 2015 just 27% of all health workers, or 20,352 employees, were employed at 4189 government facilities, while 73%, or 55,028, were employed at 3784 private facilities.

The increasing popularity in private health services has led to an influx of foreign investment in recent years, as major international financiers, most notably the International Finance Corporation (IFC), move to capitalise on rising middle-class demand.

Ifc Investment

The IFC, which acts as the World Bank’s private sector lending arm, became an important conduit for private sector investment in Kenyan health care after launching a campaign to scout for opportunities in private health care in the country.

In August 2015 the bank signed a deal with three Kenyan doctors to establish a KSh1.8bn ($17.6m) multi-specialty hospital. Set for construction in Nairobi, the Iso Health Limited hospital will receive KSh577m ($5.6m) from the IFC, with the remainder provided by the Africa Health Fund (AHF), a private equity fund.

Of the total investment, KSh500m ($4.9m) will be used for construction of a two-storey building, with the remainder going towards operational costs. The 130-bed, 7926-sq-metre hospital will be built on a 10,000-sq-metre plot, which will be purchased from one of the doctors sponsoring the project. The project will be jointly managed by the IFC and Indian hospital operator Narayana Health. Construction is expected to be finished by end-2017.

Abraaj Investments

The IFC has also made significant investments in health care in partnership with private players including Abraaj Capital, a Dubai-based private equity firm. Together with the IFC, Abraaj co-funds the AHF, which along with the Investment Fund for Health in Africa (IFHA) are two of the largest health-oriented private equity funds in Kenya. IFHA is backed by the IFC, as well as the Netherlands Finance Development Company, the African Development Bank (AfDB), Pfizer, Goldman Sachs and the Social Investor Foundation for Africa. Abraaj Group is in the midst of expanding its global network of hospitals in developing countries, including India, Pakistan and Ethiopia. The company launched a new private equity vehicle, the $1bn Growth Markets Health Fund, in July 2015 with the IFC and AfDB later investing $150m and $25m, respectively. The company has increasingly targeted opportunities in Kenya, with Abraaj investing KSh20bn ($195.1bn) in the country’s health care as of January 2017, making it one of the largest single investors.

New Hospitals

Much of its investment has focused on refurbishing and building private hospitals. In November 2013, for example, the AHF announced it would invest $2.5m to acquire a 12% stake in the Nairobi Women’s Hospital, adding to a $2.6m stake purchased in 2010, and bringing the company’s total share to 21.8%. The development finance institution of Sweden, Swedfund International, holds a 19.2% share, while hospital founder Sam Nthenya maintains 51%.

AAR Health Care (AARHC), which maintains a network of 14 clinics in Kenya, has also benefitted from the AHF. In 2013 the IFC committed $4m of investment to AAR, while Swedfund International announced in April of the same year that it planned to invest $3m in the company’s expansion. Abraaj, for its part, has committed KSh340m ($3.3m) to AARHC, according to a January 2017 report in local media.

In April 2015 AARHC unveiled plans to build a 100-bed hospital in Nairobi, as part of a KSh10bn ($97.6m) expansion plan targeting Kenya and the surrounding region, with developers announcing in February 2016 that land negotiations for the new facility were close to completion. In October 2016 Abraaj was one of nine investors negotiating a potential $1bn acquisition of Nairobi’s Metropolitan Hospital, although details had yet to be announced at the time of publishing.

Clinics And Pharmaceuticals

Private equity firms are moving to invest in health clinics. This includes the US-based Acumen Fund, which announced a $600,000 equity investment in clinic chain Miliki Afya, in February 2014. The most notable recent pharmaceuticals deal came in November 2016 when UK-based, private equity firm LeapFrog announced it had acquired all 19 branches of Kenya’s Goodlife Pharmacy for KSh2.2bn ($21.5m) – the largest investment in the private health care sector recorded that year.

Health clinic networks are also attracting new investment, with Kenya’s Equity Bank announcing in March 2015 that it planned to move into health care services by launching Equity Afia, a chain of clinics, across the country. Equity Bank is the first financial institution in the country to make such a move, and according to the bank, Equity Afia clinics will offer diagnostic services, lab tests, outpatient care and pharmacy dispensing, as well as dental services.

Human Resources

Another high-potential investment area is in human resource development, as evidenced by the June 2016 announcement that American multinational, General Electric (GE), will invest KSh1.3bn ($12.7m) in a new health care training institute. An estimated 10,000 health professionals from Kenya and East Africa will undergo skills-based training at the institute by 2020, in both clinical applications and technical courses. Over the longer term, course offerings will be expanded into biomedical, clinical education and leadership training, with an emphasis on training new biomedical engineers, radiologists and clinical technicians, according to GE officials. This will pave the way for long-term expansion of private facilities and alleviate pressure on the public system.